If you have engaged in the Rollover as Business Startups (ROBS) solution to finance a new or existing business, you may still have questions regarding transactions you are now encountering. Here, we provide answers to a few of the most commonly asked questions we receive from our clients.
The ROBS Structure Defined
The ROBS Solution allows individuals to use funds from eligible retirement accounts, like a 401(k) plan or IRA to invest in a new or existing business/franchise without paying tax or incurring penalty. The structure is legal due to an exception to the prohibited transaction rules under Internal Revenue Code section 4975(d)(13). It is an IRS and ERISA approved structure that allows a 401(k) plan to purchase corporate stock. It is the only legal solution for investors to fund a business they will be personally involved in without triggering the prohibited transaction rules. Individuals in need of less than $50,000 can use a Solo 401(k) loan, which permits a penalty-free loan of $50,000 or 50% of the individual’s account value – whichever is less. However, if you need more than the Solo 401(k) loan can provide, the Rollover as Business Startups structure may be right for you.
You can learn more about the structure by visiting our ROBS learn more page.
Common Questions After Employing the ROBS Solution
Can I Re-Use the ROBS Solution?
Most businesses that employ the Rollover for Business Startups (ROBS) Solution find themselves in need of additional funding. You can re-use the ROBS solution by funding your 401k in one of two ways.
- Contribute money to 401k as contribution based off of your salary
- Rollover from another retirement plan into the 401k
Once you have funded your 401k through a contribution or rollover, you can use the money to put towards your business through the purchase of stock in the corporation. This is known as the qualifying employer securities, an exemption that allows investors to use retirement funds to invest in a business they are personally involved in.
After your 401k purchases stock in the corporation, you must receive a valuation of stock through an independent third party so the 401k can buy the stock at fair market value. Additionally, you must give your employees who participate in the 401k an option to participate in the stock purchase.
Am I Required to Provide a Retirement Plan to Employees?
You must provide eligible employees the option to participate in the company’s 401k plan. The employee does not have to participate, but you need to prove to the IRS that you offered the plan.
At IRA Financial, we can help you draft your plan documents.
How Can I Take Money out of the Corporation?
A common question we receive from clients who have recently employed the ROBS solution is how to take money out of the corporation any time they want. Technically, you can take money out of the corporation, but not anytime you want.
After employing the ROBS solution, you must run the company like you would any other business. As a result, you can take money out of the corporation the same way you would any other business: by earning a salary, receiving a bonus or taking out a loan from the company. These are the main ways that you can “take money” out of the corporation.
What Kind of Recordkeeping do I Need?
It’s important to know that you are dealing with two different types of entities when recordkeeping/tax reporting. On one hand, you perform recordkeeping for a C corp., which is a taxable entity that files a tax return: Form 1120. On the other hand you have the 401k plan, a tax-exempt entity which has different reporting requirements. You must file Form 5500 for the 401k plan (in the case of a Solo 401k, file form 5500-EZ if the plan exceeds $250,000).
The ROBS solution, you must file Form 5500 but you are not allowed to use the short form. This is because your 401k retirement plan purchases corporation stock, which requires individuals to file the full 5500.
Employers can hire a third-party administrator (TPA) to ensure that the plan is fully IRS and ERISA compliant. Your TPA will help you customize a plan that meets your retirement and tax goals, while benefiting your business and your employees.
Get in Touch
The Rollover for Business Startups Solution may have only four steps to get started, but is a very complicated structure to navigate prior to getting started and afterwards. If you have more questions, please contact us directly at 800-472-0646. Our tax and ERISA specialists will be available to assist you.